Now that Bitcoin ETF hype has died off, the price trajectory of the leading crypto asset is back in the hands of the Federal Reserve, a new analysis suggests.
In a Friday report, European digital asset manager CoinShares said Bitcoin’s price movements again appear driven by the broader interest rate conversation.
“A closer examination of the last 40 trading days reveals an increased alignment with the interest rate expectations for June,” wrote CoinShares Head of Research James Butterfill. “A similar trend was observed in 2023.”
According to CME Fedwatch, the market appears certain that interest rates will stay flat in June, only potentially dropping in Q4 of this year.
Core PCE inflation—the Fed’s preferred inflation metric that excludes food and fuel—has proven much more sticky than expected over the last several months, remaining flat at 2.8% in March. Conversely, GDP growth figures have proven underwhelming, recording 1.6% in Q1 2024, as compared to 3.4% in the prior quarter.
Data also shows that growth in the manufacturing and services sectors are contracting and stalling respectively.
Such metrics fuel fears of stagflation, raising expectations that the central bank will keep rates higher for longer. In response, CoinShares explains, Bitcoin’s price fell below $57,000 leading into the Fed's next meeting on May 1.
While the central bank maintained its policy rate above 5.25%, however, it also announced a “dovish surprise” with plans to taper its quantitative tightening (QT). This would mean reducing its balance sheet by $25 billion per month, rather than its prior $60 billion rate, slowing the rate at which it contracts the economy’s dollar supply.
Theoretically, that’s good for Bitcoin and other risk assets, which have previously thrived in easy-money macro environments. Bitcoin’s price recovered above $60,000 shortly after the Fed’s announcement.
“Keeping front-end rates elevated while simultaneously tapering QT can be likened to both applying the brakes to a car and accelerating at the same time,” Butterfill wrote. The U.S. Treasury, he added, may be reaching its limit in paying off its short-duration debt, leaving a shift in the Fed’s QT strategy as the only remaining option.
Butterfill expects the Fed to cut rates later this year in response to weaker economic data, with the cut likely being “late, but greater than expected.”
“With Bitcoin’s fixed supply and high immutability, when the Fed eventually cuts rates, it is probable that this tumultuous situation will support Bitcoin prices,” he added.
Edited by Ryan Ozawa.